The Ultimate Guide to Self-Employed Retirement Plans

5/17/2017

Being self-employed has a lot of advantages, the biggest of which is being your own boss. Being independent is great, but it also leaves you in charge of your own retirement plan. So, what is the best retirement plan for the self-employed? We’ve rounded up four of our favorites to help you plan for your future.

Simplified Employee Pension (SEP)

It might be for you if…

The SEP IRA maximum contribution is 25% of the W-2 income you pay yourself. These contributions are tax-deferred, and can continue to grow until you begin withdrawals. That means you can start at 59 ½ if you wish. You aren’t required to withdraw from your accounts until you reach age 70 ½. With an SEP, you don’t have to file annually with the IRS, either.

But…

You are the sole contributor to this plan. That means that if you have employees, they have to be included in this retirement plan, too. You also cannot contribute more to your plan than to theirs.

Solo 401(k)

It might be for you if…

Since you are technically both the employer and the employee, you can contribute more to this type of 401(k) than most other plans. As with a traditional 401(k), all your contributions are pre-tax dollars (you will pay tax on withdrawals). As an employer, you can contribute up to 25% of your business’s total earnings; as an employee, you can also contribute up to $18,000 a year. Employer contributions can also be deducted as a business expense.

But…

The rules for who can open a Solo 401(k) are strict; you’re eligible only if you have no other employees. If you have at least $250,000 in your account, you’ll have to file annually with the IRS.

Savings Incentive Match Plan for Employees (SIMPLE) IRA Plan

It might be for you if…

You can contribute up to $12,500 yearly into a SIMPLE IRA (you can add an additional $3,000 if you’re 50 or older). As with the Solo 401(k), you won’t have to pay taxes on your contributions until you begin withdrawal, and you can deduct matching contributions as a business expense as an employer.

But…

You simply can’t contribute as much as you could to other retirement plans. And if you have employees, you might have to match their contributions. The money you put into a SIMPLE IRA could also count against the $18,000 you can contribute to your Solo 401(k).

Defined Benefit Plan

It might be for you if…

Your contributions can grow tax-deferred, and can be written off as a business expense. The Defined Benefit Plan also plays nicely with other retirement plans; you can contribute to it while also contributing to a 401(k) or SEP IRA. The biggest advantage is probably the very high contribution limits. While they vary based on age, you could put away more than $100,000 a year if you choose.

But…

Once you commit to putting away a certain amount of money, there’s no going back; you have to keep contributing that amount. These plans also take more time and money to set up, and you have to offer this plan to any employees you might have.

You’re self-employed because you enjoy flexibility and options. Fortunately, there are retirement plans out there that can offer that. And you don’t have to navigate the path to retirement alone; for questions on how to protect your future and the things that matter most to you, contact your Farm Bureau agent.

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